These companies are benefiting from the growing adoption of AI hardware and software.
The past few years have been absolutely phenomenal for tech stocks, evidenced by the 90% gains the stock markets have made. Technology sector Nasdaq-100 index during this period, and artificial intelligence (AI) is one of the main reasons behind this remarkable increase.
After all, AI has created significant demand for hardware such as semiconductors and server components, while also creating a need for software that can be deployed in real-world situations to help users increase their productivity and improve efficiency. More specifically, demand for AI hardware is expected to grow 31% annually through 2035, generating annual revenues of $624 billion.
Meanwhile, the AI software market is expected to experience a compound annual growth rate of nearly 34% over the next five years. That’s why we’ll take a closer look at AI-related prospects Taiwanese semiconductor manufacturing (TSM 4.12%)popularly known as TSMC, and Twilio (TWLO 2.34%)two companies that can help investors capitalize on the growing demand for both AI hardware and software.
1. Semiconductor manufacturing in Taiwan
Semiconductors play a crucial role in the spread of AI, with AI models being trained using chips such as graphics processing units (GPUs), central processing units (CPUs), and application-specific integrated circuits (ASICs). This is why the likes of Nvidia, Advanced micro devices, BroadcomAnd Marvell technology are seeing strong demand for their chips.
The common link between these companies is TSMC. The semiconductor companies mentioned above are fabless in nature, meaning they simply design their chips while outsourcing production to a foundry like TSMC. As a result, TSMC reported a tremendous acceleration in growth this year.
The Taiwan-based foundry giant’s revenue rose 32% year over year in the first nine months of 2024. For the full year, TSMC management expects sales to increase by almost 30%. That would translate into revenue of $90 billion, based on the company’s 2023 revenue of $69.3 billion. It’s worth noting that TSMC’s revenue fell nearly 9% last year as the company struggled due to poor demand for smartphones and personal computers (PCs).
However, the arrival of a new catalyst in the form of AI has remarkably changed TSMC’s fortunes in 2024, evidenced by the impressive growth it achieved in the first nine months of the year. That’s not surprising, as demand for AI chips has simply skyrocketed, with Future Market Insights estimating that this market could see annual growth of 26% over the next decade.
This puts TSMC in a great position to deliver robust growth in the coming years as it produces chips for the major players in this market. Moreover, according to Counterpoint Research, TSMC is the largest foundry in the world with a 62% market share. This further reinforces the fact that the company will play an important role in the growth of the AI chip market in the long term.
However, this isn’t where TSMC’s AI-related prospects end. The company also produces chips for consumer devices such as smartphones and PCs. AMD, AppleAnd Qualcomm use TSMC’s production factories for this production chips for their products. With the demand for AI-enabled smartphones and PCs ready to take offthis could prove to be another lucrative growth driver for TSMC.
All this explains why analysts predict that TSMC will achieve healthy earnings growth going forward.
TSM EPS estimates for the current fiscal year data Ygraphs
More importantly, investors can buy this stock now at an attractive 21 times forward earnings, which is a discount to the Nasdaq-100 the index’s future earnings multiple of 30 (using the index as a benchmark for technology stocks). So investors who have a AI Stocks to their portfolios in November, TSMC should definitely take a closer look as it has the potential to provide more upside.
2. Twilio
Twilio operates in the communications platform-as-a-service (CPaaS) market, offering customers application programming interfaces (APIs) that allow them to connect with their customers across multiple channels, such as voice, video, chat, email and others. . The company also offers a customer data platform through which it creates a centralized database of all interactions a company has with its customers.
Twilio is now using AI to help its customers improve their customer service experience and sales by combining its communications expertise with customer data. The company pointed to his latest earnings conference call that it is “integrating AI and machine learning across the Twilio platform,” a move it says will allow it to “automate capabilities, increase productivity, and drive personalization at scale.”
Management added that customers who started using Twilio’s AI tools saw an improvement in their sales performance. CEO Khozema Shipchandler said during the earnings call:
The company recently ran an email campaign targeting customers most likely to purchase Apple products and saw a 592% increase in email sales. This is just one of many examples of the unique value Twilio provides, helping brands drive better engagement and deliver more. Value and create more trusted customer experiences.
The adoption of AI tools by Twilio customers is now improving the company’s revenue. It reported third-quarter revenue growth of 10% year-over-year to $1.13 billion, a nice improvement over the 5% year-over-year growth it posted in the same quarter last year. In fact, Twilio’s addition of AI tools to its platform is encouraging customers to spend more money.
This is reflected in the dollar-based net expansion rate of 105% for the third quarter, which was again an improvement on the 101% of the same period last year. A dollar-based net expansion rate of more than 100% means Twilio’s existing customers have increased their use of the company’s solutions or adopted more of its offerings. That’s because this metric compares Twilio customer spending in a quarter to the same group of customers spending a year ago.
Improved customer spending and Twilio’s focus on controlling costs are why earnings rose at an impressive 76% pace from the same period last year to $1.02 per share in the previous quarter.
Consensus estimates expect Twilio’s earnings to grow nearly 20% annually over the next five years, meaning operating income could reach $6.09 per share in 2028 (based on 2023 earnings of $2.45 per share) .
Assuming it can achieve that goal in the next five years and (at that time) trades in line with the Nasdaq-100 index’s forward earnings multiple of 30, its stock price could reach $183. That would be an increase of 110% from current levels.
Twilio currently trades only 22 times future profitsmeaning it is attractively valued. Investors have the opportunity to buy it before it gets higher following the last quarterly report.